Employment Related Securities Succession

When company employees pass on their shares to the next generation as part of succession planning, there are several issues to consider. HMRC guidance in the Employment Related Securities manual ERSM20220 focuses on ERS transactions’ tax implications and reporting requirements.

Here are some of the key issues to consider when transferring shares as part of succession planning:

1. Valuation of shares: Determining the market value of the transferred shares is crucial, as it will affect the tax implications for both the giver and receiver. The valuation should be agreed upon with HMRC to avoid any disputes.
2. Capital Gains Tax (CGT): The transfer of shares may trigger CGT liabilities for the transferor if the shares have increased in value since the acquisition. However, some reliefs are available, such as Holdover Relief, which can defer the CGT liability until the recipient disposes of the shares.
3. Inheritance Tax (IHT): Shares transferred as part of succession planning may be subject to IHT. However, potential exemptions and reliefs, such as Business Property Relief, can reduce or eliminate the IHT liability on qualifying business assets.
4. Income Tax and National Insurance Contributions (NICs): Depending on the nature of the share transfer, the recipient may be subject to income tax and NICs on the value of the shares received. For example, if the shares are considered employment-related securities, the recipient may be taxed on the difference between the market value of the shares and the amount paid for them.
5. Reporting Requirements: ERS transactions must be reported to HMRC annually using the ERS Online Service. The company and individuals involved need to ensure compliance with these reporting requirements to avoid potential penalties.
6. Shareholders’ agreements and company articles: The transfer of shares may require amendments to the company’s shareholders’ agreement and articles of association to reflect the changes in share ownership and control.
7. Family dynamics: Succession planning often involves complex family dynamics, leading to disputes and disagreements. It is essential to consider the impact of share transfers on family relationships and engage in open communication to address concerns and minimize conflicts.

In conclusion, transferring shares as part of succession planning involves several tax, legal, and interpersonal considerations. Accordingly, company owners should consult with tax and legal professionals to understand the implications and comply with relevant regulations and requirements. You can call us to discuss your personal circumstances with our specialist tax advisors.